Private Agreements Not Binding on Financial Institutions Without Explicit Consent: NCLT Kochi

Private Agreements Not Binding on Financial Institutions Without Explicit Consent: NCLT Kochi

Introduction

The National Company Law Tribunal (NCLT), Kochi Bench, has held that any private agreement between the corporate debtors, borrowers, and guarantors is not binding on the financial institutions unless the institutions are parties to the agreement and have explicitly consented to it.

Factual Background

During the Corporate Insolvency Resolution Process (CIRP) of the corporate debtor, certain applications were filed alleging ownership over parts of the corporate debtor's assets based on a Memorandum of Understanding (MoU) and addendum executed between the applicant and the respondent.

Procedural Background

The applicant contended that the MoU constitutes a binding agreement, and the assets were required to be transferred to the applicant. The resolution professional contended that the applicants had no locus standi, as they were neither creditors nor stakeholders in the CIRP.

Issues

1. Binding Nature of Private Agreements: Whether a private agreement between the corporate debtors, borrowers, and guarantors is binding on the financial institutions.

2. Locus Standi: Whether the applicants have the locus standi to intervene in the CIRP.

Reasoning & Analysis

The bench of Justice Vinay Goel (Member-Judicial) and Madhu Sinha (Member-Technical) observed that the applicants have no locus standi to intervene in the CIRP, as they were not participants in it in any capacity. The bench further noted that the MoU and its addendum were neither registered nor executed by the resolutions of the board. The tribunal held that any private agreement, including an unregistered MoU, cannot defeat the statutory process to impair the rights of the secured creditor.

Decision

The NCLT dismissed the application, holding that the applicants lack locus standi to intervene in the CIRP of the corporate debtor. The bench also observed that if the applicants are guarantors, the financial creditor may proceed against them separately under the IBC.

Implications

The decision clarifies the supremacy of creditors' rights under the IBC and the binding nature of private agreements on financial institutions.

Conclusion

The NCLT's judgment in this case provides clarity on the locus standi of applicants in CIRP and the binding nature of private agreements on financial institutions. The decision is significant for corporate debtors, financial institutions, and resolution professionals.

In this case the applicant was represented by Mr. Aravind Pandian and Mr. Akhil Suresh, Advocates.